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Costco’s Taiwan Success Story

The Costco store in Taichung leads the world in the number of members and comes in second, to a store in Korea, in total sales value. Photo: Costco

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Some of the multinational company’s busiest stores in the world are located in Taiwan.

Among the 759 Costco stores in the United States and 10 other countries and regions, the operation in central Taiwan’s Taichung ranks at the very top in the number of members and is second in the world in sales volume (the exact figures are confidential), behind South Korea’s Yangjae store in Seoul.

Even more impressively, of the 13 Costco operations in Taiwan, three – Taichung, Neihu, and Chungho – rank in the top 10 in the world in sales volume.

Clearly Taiwanese consumers, who love a bargain, appreciate the business model of the iconic big-box American wholesaler-retailer. “Value and quality” are the key to Costco’s success, says Louie Silveira, vice president and country manager of Costco Wholesale Taiwan. “It all comes down to our mission statement, which is to provide goods and services at the best possible price. We do comparative shopping extensively, and in any market we’re in [around the island] I can tell you the price of every item of every retailer.

“But while we’re fanatic about pricing, we don’t necessarily want to be the cheapest. The quality has to be there. We always want to make sure we’re offering the very best value.”

In Costco’s early days in Taiwan – it entered the market in 1997 as a joint venture with Kaohsiung’s President Department Store – the initial reception was less enthusiastic. “For the first five years we lost money,” recalls Richard Chang, then the country manager and now Costco’s Senior Vice President for Asia. “I’d go back to Seattle for meetings and have to explain that in a totally new market” it takes time for consumers to recognize the benefits of shopping at Costco. “It’s always a bit of a struggle in the beginning, and we don’t do any advertising, so the growth is all organic.”

One of the early challenges was that uniquely among retailers in Taiwan, Costco operates on a membership basis. Businesses currently pay an annual fee of NT$1,150, while individual consumers are charged NT$1,350 for what is called a Goldstar Membership. The cards are valid at any Costco store in the world.

When the first Costco Taiwan store opened in Kaohsiung, many prospective shoppers balked at the idea of paying a membership fee. “They didn’t understand the value proposition,” says Chang.

“Now the membership fee isn’t an issue any more. People see that they can get a recognized high-quality brand at a low price – that’s where the value of the membership comes in. All you have to do is buy one big item and you’ve made your membership fee back for the year.”

In fact, in membership retention Costco Taiwan ranks second in the world. At 89.4%, the rate is just ever so slightly behind the 89.6% in the United States.

Imported items, many of them under Costco’s signature “Kirkland” brand, consistently account for about 40% of the goods in a Costco Taiwan store. “That’s an advantage because the Taiwanese have a great affinity for America,” says Chang. “A lot of people went to school in the U.S. and when they come back they want to enjoy the same kinds of products they used to have in the States.” By stocking items like over-the-counter medications, vitamins, and breakfast cereals that can be hard to find elsewhere in Taiwan, Costco relieves consumers of the need to lug those products back from trips abroad.

For some food items, however, Taiwanese tastes may diverge somewhat from what is popular in other markets. “It can’t be too sweet, and it can’t be too salty, and it can’t be too hot,” explains Silveira, a 30-year Costco veteran who previously served with the company in such places as Chicago, Seattle, Utah, California, and Alaska. “The Taiwanese palate is quite refined. People here are sensitive to an excess of heat, sodium, or sugar.”

As a result, Costco will sometimes adjust a Western product to make it more acceptable to Taiwanese preferences. An example is Caesar salad dressing. “True Caesar salad has a high acidity level with freshly squeezed lemon, and the anchovies give it a bit of a fish taste,” says Silveira. “It doesn’t go over well here. We’ve had to modify our Caesar dressing to tone down the acidity level and sweeten it up a tad. An American wouldn’t even recognize it – it’s more like Caesar meets Ranch – but it’s very well accepted here.”

Similarly when Costco Taiwan recently introduced a chicken sandwich, it experimented with the recipe to come up with something that would appeal to local customers. Special attention was paid to the sauce. “We wanted to have a Thai flavor because Thai food is appreciated here, but we also knew that many people here are super-sensitive to an excess of Thai heat,” Silveira notes. “So we modified the sauce so it’s not too sour, not too sweet, not too hot. We have to find that middle ground where more people will enjoy it.”

A Costco store typically carries more than 3,100 different products, or stock-keeping units (SKUs) as they are known in the trade. But the number varies by department according to the season. The peak times for apparel are late summer/early fall and again in spring/early summer, while consumer electronics and appliance sales are heaviest before Chinese New Year when people have their bonuses to spend on larger purchases.

“A lot of our merchandising is built around seasonality,” says Silveira, noting Costco’s guiding philosophy of “six rights” – the right product at the right place at the right time in the right condition in the right quantity at the right price. At the time of the interview, he and his staff were gearing up for the Moon Festival when Taiwanese enjoy going outdoors to “appreciate the [full] moon” while snacking and barbecuing.

Many SKUs are staple products in demand all year long. Silveira cites the example of toilet paper, which is sold by Costco in such large quantities that “it’s always strategically placed by our loading docks, since that’s the easiest way to keep it stocked.”

Room for expansion

Silveira sees opportunity for Costco to continue to expand in Taiwan, in part through enlargement of its e-commerce program. But he notes that Taiwan probably has sufficient population for the company to open another six or seven stores over the next 10 years. The challenge will be finding the right sites – parcels of five to six acres that are zoned for business and don’t require negotiating with dozens of different land owners.

“Once we have the land and get all the permits we need to open up for business, it’s pretty smooth sailing,” he reports. “The local governments tend to be very welcoming and accommodating.”

Labor supply is not an issue, Silveira says, despite the company’s large payroll of around 5,600 employees. “We have a good package for employees and take great pride in making sure they are well looked after.”

Annual membership growth in recent years has been steadily in double digits. Costco’s marketing department conducts various activities to attract members, often in cooperation with professional and other organizations. “But the best advertising is probably that big building, which is like a giant billboard in itself,” says Silveira. “I’d say that 60-65% of our membership growth probably comes from those big buildings just being there, attracting people’s interest, plus word of mouth.”

Given the increased public consciousness about food safety in recent years, Costco stresses the strict attention it pays to product quality. “For every new item we come out with, we have to submit protocols, procedures, SOPs – an entire checklist of everything you need to do – and they are executed very carefully,” says Silveira.

“Because we’re so proud of that program, we put everything behind glass. We want our members to look inside the meat department and see fresh meat being cut right in front of them. We want them to see fresh sushi being made and kept on the shelf for only about an hour, and to view the rotisserie chicken turning on the spit and then bagged while it’s still warm.”

Richard Chang notes that during the SARS epidemic in 2003, when many people were hesitant to go out in public, Costco’s business boomed. “People would come to Costco to buy food because they trusted it. Our members appreciate that we go the extra mile and go through all the certifications.”

Chang, whose family moved to the United States when he was four, grew up in Southern California. While playing basketball at the University of California at Berkeley, the 6’5” Chang got reacquainted with Taiwan when he was invited to join the Taiwanese team in the Jones Cup tournament. After graduation he returned to Taiwan, where he served as a junior executive at McDonald’s while also playing for a semi-pro basketball team sponsored by the fast-food company.

After a few years, he was back in the United States and working for Price Club, the pioneer of the warehouse store business model, which later merged with Costco. When Costco decided to move into the Taiwan market, it appointed Chang to head the operation.

“Professionally it’s been great, but also personally – from the point of view of my heritage – it’s been a marvelous opportunity to reconnect with Taiwan,” says Chang. “My wife is Taiwanese, and my children have had the unique experience of being ‘third-culture’ kids.”

Chang is equally enthusiastic about his current role of overseeing Costco’s expansion in Asia. Besides the 13 stores in Taiwan, the company now has 26 in Japan and 14 in Korea, and is preparing to set up shop in China, starting with two locations in the Shanghai area. Chang sees the growing regional presence as providing a platform for cross-border collaboration. For example, Japanese seaweed snacks procured through Costco Japan are now available in the Taiwan stores, and “in Korea and Japan they can have some really cool Chinese New Year items that they get from Taiwan,” he notes. “It’s great to be able to share information and leverage one another’s buying power.”